Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

The One Stock You Must Buy

By Tim Hanson - Updated Nov 10, 2016 at 8:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's out there waiting for you.

Stop me if you've heard this one. The one stock you must buy is ... the next Microsoft (Nasdaq: MSFT), the next Wal-Mart (NYSE: WMT), the next Adobe (Nasdaq: ADBE), and the next Dell (Nasdaq: DELL) all rolled into one.

I'm sure you've heard some semblance of that pitch at cocktail parties, golf outings, weddings, and of course, on the Internet.

It's a pretty appealing pitch. After all, Microsoft, Wal-Mart, Adobe, and Dell are some of the stock market's greatest success stories. These companies have earned early investors simply mind-boggling returns over their lifetimes.

The secrets of success
So the question is: Does that one stock you must buy exist? Of course it does. But can you find it? That's a different matter.

Here, however, is a litmus test to gauge every stock tip you come across. Simply ask: Does this company bear any resemblance at all to Microsoft, Wal-Mart, Adobe, and Dell before they were big names?

That's not to say that one stock will be a discount retailer or a tech superstar. Rather, Microsoft, Wal-Mart, Adobe, and Dell all share a set of remarkable traits that characterized them when their remarkable stock market runs began. All were:

  1. Small.
  2. Led by a dedicated founder.
  3. Fiscally conservative.
  4. Profiting from a wide market opportunity.

If the next stock that's pitched to you doesn't possess these traits, then you're probably better off passing.

A case study
Consider, for example, the case of Sirius XM Radio (Nasdaq: SIRI) -- the stock that is most often pitched to me at cocktail parties, golf outings, weddings, and of course, on the Internet.

It it small? It is today since its stock has been crushed, but just six months ago Sirius was capitalized at $4.5 billion.

Is it led by a dedicated founder? No. Though Mel Karmazin has entertainment industry experience, he only came aboard in 2004.

Is it fiscally conservative? No. The company is not profitable, carries a heavy debt burden, and continues to dilute shareholders.

Does it have a wide market opportunity? Folks may disagree with me here, but I think the markets for music and news are already fractious and saturated.

The Foolish final word
I'm not here to be negative about Sirius. The company could right its ship and reward investors. However, I don't think that it possesses the core traits that made companies like Microsoft, Wal-Mart, Adobe, and Dell such incredible investments -- the qualities we seek in the Motley Fool Hidden Gems small-cap investing service.

Again, we believe that tomorrow's big winners will start off:

  1. Small.
  2. Led by a dedicated founder.
  3. Fiscally conservative.
  4. Profiting from a wide market opportunity.

If you'd like to take a look at the companies we've found that meet the four criteria mentioned above, click here to join Hidden Gems free for 30 days.

This article was first published on Oct. 19, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Microsoft, Dell, and Wal-Mart are Inside Value recommendations. The Fool's disclosure policy assures you that no stocks were harmed in the penning of this article.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$136.84 (1.01%) $1.37
Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
SIRI
$6.21 (-0.56%) $0.04
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$319.94 (-2.90%) $-9.55
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$607.91 (-9.52%) $-63.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
640%
 
S&P 500 Returns
139%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.